Why The Street Believes Kate Spade Will Be Acquired, But Has Doubts On Angie's List

Seeking Strategic Alternatives

In its third-quarter earnings release on November 1, Angie's List announced it has hired two banks to explore strategic alternatives. The company is wading through muddled waters, as it gave up its subscription model and began to use tiered plans that included a free model mid-2016. Even as users made a beeline to the company, its revenues and profitability suffered.

Loop Capital believes Angie's List could find a strategic partner or acquirer, although it has to show improvement in its financial metrics for a better deal price.

On the other hand, Kate Spade confirmed rumors it is reviewing strategic alternatives with a leading investment bank. Reports suggest the company has already received a first round of offers.

Wunderlich analysts Eric Beder and Bryan Caronia said they believe, with a revenue base at 30 percent of Coach Inc COH, no penetration in Europe beside footholds in the U.K. and France, limited Asian penetration outside Japan and only 108 full-price North American stores, Kate Spade represents a compelling lifestyle-driven growth story for potential buyers with already impressive returns and margins.

Q4 Results

Other Metrics

• Paying service provider number fell by 413.
• Service provider revenues were down 8 percent.
• Paid members were 2.6 million, in line with expectations.
• Gross paid membership addition was 9,298, a mere 1 percent of the total members.

Wunderlich noted that Kate Spade's fourth-quarter adjusted earnings per share were well above the consensus estimate, helped by better-than-expected international margins and strong overall operating leverage. The firm also views the overall direct-to-consumer comps of +9.3 percent were easily the best in the segment.

Shying Away From Guidance

Citing its pursuit of strategic alternatives, Angie's List did not give any guidance. Loop Capital believes revenue growth won't return until the second half of 2017, despite the promising member growth and engagement metrics. Meanwhile, Kate Spade said in its fourth-quarter release it won't give any forward-looking guidance, citing the exploration of strategic alternatives it has embarked on.

Analyst Action

Loop Capital has a Buy rating on Angie's List, while it lowered its price target to $9 from $12, reflecting the slower turnaround.

Kate Spade is Buy-rated by Wunderlich, while its price target is $24.

Stock Performance

Over the last one year, Kate Spade has gained 40 percent compared to a 40 percent drop in Angie's List's shares. Investors, apparently, are not buying into the idea of a sale for Angie's List despite the slight fundamental improvement.

ANGI data by YCharts Source: Y Charts

At last check, Angie's List was up 0.44 percent at $5.46 but Kate Spade, in reaction the financial results and its decision to explore strategic options, was surging up 14.95 percent to $22.61.